Given the percentages above, it’s no surprise that, to offset a likely drop in exports to the US, substitute markets would need to absorb the EU’s supply during a tariff war
As such, the proactiveness of the European Commission in negotiating a wide array of new trade agreements since the 2024 US Election will likely prove extremely useful.
In December 2024, the Mercosur trade agreement was revived, allowing the EU to further tap into a market to which its exports reach € 56 billion in goods (in 2023) and € 28 billion in services (in 2022). The agreement will protect EU interests by:
In January 2025, the negotiations for a Global Agreement between the EU and Mexico were concluded, granting, primarily:
- Increased market access for agri-food exports, through the removal of 95% of high Mexican tariffs;
- Export restrictions removal on raw materials, including import duties, which will result in cheaper products; and
- Prohibiting export monopolies and unjustified government intervention in price setting
In February 2025, the EU Commission announced, during a trip to India, the goal to reach a free trade agreement by the end of year. Though such type of agreement has been delayed in the past, there are reasons to be optimistic:
- bilateral trade of goods between the EU and India reached € 124 billion in 2022-2023, alongside € 59.7 billion in trade of services in the same period.
- India signed a $ 100 billion free trade agreement with the European Free Trade Association (EFTA) in 2024
These are just some of the latest trade agreements or trade negotiations launched since a second Trump presidency was announced, not including older agreements that are just now coming into effect or other negotiations that have been announced since then, proving once again, that the US Administration’s claim of being “one of the most open economies in the world, and the lowest average tariff rates in the world” really falters when faced with reality.
However, the EU’s role of preparing for a tariff face-off with the US is not, and should not, be limited to merely replacing the US as the trade partner through other trade agreements.
The preparation must also include improvements to the EU’s own trade capabilities through internal improvements, something already recommended by the Competitiveness Report provided by Mario Draghi and resulting in the Commission’s proposed Competitiveness Compass, aimed at further reducing internal barriers, ensuring access to critical raw materials and capital financing.
Though implementing it will prove complicated and potentially controversial with trade partners due to its proposal for internal subsidies, it offers an opportunity to improve the efficiency and capability of Europe as a motor of trade and production.
With the increase of markets to which European goods and services can flow, as well as the increased efficiency of internal markets, the impact of tariffs coming from the US market could then be mitigated.
However, as seen above, the US market is simply too significant to be cut off without incurring severe negative impacts to all EU member states, underscoring the need for Europe to renegotiate and minimize the US tariffs imposed.
3. What can we bring to the tariffs’ negotiation table?
Firstly, a key consideration is to be taken into account: tariffs in the trade between developed nations is considered, as a rule of thumb, to be a lose-lose situation for everyone. Conversely, Trump has made his thinking clear, one where a transactional zero-sum game is to reign, with punitive tariffs as its primary means to do so.
Unlike the US, the EU can follow a more strategic course of action that doesn’t base itself on blankly applied retaliatory tariffs, bringing in a more savvy approach capable of managing the US’ blunt tantrum-like perspective.
In the first instance, appeal to the basic nature of trade. If the US wants to decrease their trade deficit with the EU, the EU should import more from the US. But what? Well, specifically, the things that the US wants to sell and that the EU, tactically, wants to buy: energy and arms.
Despite several rounds of sanctions and attempts at weaning Europe from the Russian energy sector, the EU continues to import energy from Russia. This is represented by the record 16.5 million metric tons of LNG obtained from Russia in 2024, surpassing the 15.2 million in 2023, with the total value of Russian fossil fuel imports reaching € 21.9 billion, higher than the € 18.7 billion spent in aid to Ukraine that same year. Considering the apparent dependence on Russian fossil fuels, what better way—while still struggling to decarbonise the European economy—to appease Trump’s “Drill Baby Drill” energy policy than to merely set up benefits to importing more energy resources from the US?
In parallel, as pleas for increased defense spending are made by European leaders, the European defense manufacturing industry is yet to break through its current capacity issues in the short-term at least, even though improvements have been made. Considering the ongoing growth of the EU-based defense sector, accompanied by increased defense spending, heightened defense purchases from the US could be used to argue in favor of easing tariffs on the manufacturing business, while the EU takes its time to find and grow their market share in other areas.
Finally, though diplomatic relations are always better suited for conflicts where negotiations are made in good faith, just like in nature, arson can be fought with strategically planned fires: retaliatory tariffs, on key sectors, that, though likely to cause its own issues to the EU-US trade relations, could help assist in the development of EU industries that are currently dependent on their US counterparts.
And taking a page from what were once some of the closest US allies, the EU could follow the Canadian example of specifically targeting the US states more closely aligned with the current US administration.
Nevertheless, the fact that such an intense trade situation has come to emerge, has led understandably to a reassessment of the economic dependency that the EU’s economy has developed when it comes to the USA.
4. Can we become more independent from the US?
As previously mentioned, in a globalized world, where free trade had been the norm, it can now seem complicated to untangle trade relationships as certain dependencies emerged.
However, with all the data available regarding trade, it is also possible to see the areas where more intense and potentially delicate dependencies can start being worked on. And, although complete entanglement would be very unlikely and troublesome, more independence can be achieved.
As mentioned previously, the EU incurs a deficit on the trade of services with the US, with increased exposure when compared with the trade of goods. The services’ category, regarding trade, can be broken into several subcategories, with the top three of EU trade being:
- Transport and auxiliary services – defined as the process of carriage of people and objects from one location to another as well as related supporting and auxiliary services (such as sea transport, air transport, etc)
- Travel Services – defined as goods and services for personal use or to give away, acquired from other economies by residents during visits to these other economies.
- Business Services – defined to include R&D, legal services, accountancy and management consultancy, and real estate services
The connections with US companies of the service sector can be readjusted with specific initiatives and reforms.
For example, a Financial Markets and Savings Union, as proposed by the European Commission, could, hypothetically, allow for a bigger private sector investment in the EU economy, while withdrawing it from other markets, such as the US.
Such impact can be measured through data such as the € 9 382 billion in stocks abroad held by investors resident in the EU, 28% of which was absorbed by the US. Additionally, the clearly more conservative saving approach of EU citizens is observable, with a third of their savings being in deposits, when compared to the US counterparts, that have a tenth of their savings in deposits. By making investment and saving products more standardized and appealing across Europe, more money could be brought from abroad and from within into the EU’s economy, assisting in the financing of its proposed investments and the desired independent and competitive industries.
Additional capital market liquidity is becoming increasingly needed, as it has become clear from the US president’s intervention, the administration seems to operate under a logic of prowess, claiming that Ukraine has survived thanks to the US and that Europe has loaned (and retrieved said loans) from Ukraine. This argument falters when faced with the facts, such as:
However, the diminishing US capability to assist Europe in military defense, while also targeting it with tariffs, make the great case for the European military defense industry to thrive while protected from its American counterpart. As highlighted previously, the purchase of additional military equipment can be used to dangle a carrot to the US administration.
However, with the direction followed by the US, the supply quality and price can no longer be taken as assured, considering the constant looming of tariffs, which becomes particularly concerning considering that between mid-2022 and mid-2023, 63% of all EU defense orders were placed with US companies.
In 2024, the US approved a military budget of $ 824 billion and $ 150 billion in defense research and development spending, while the EU’s aggregated military budget estimates reached € 326 billion and a meager €10.7 billion euros in defense research.
However, if the EU members were to match the 2% of GDP NATO military budget commitment (without including the UK), under the 2024’s estimates of a $ 19.7 trillion GDP, it would reach a $ 394 billion military budget, with much of that potentially becoming available for EU firms, in addition to the billions that could be weaned off from the US Military complex, as well in savings that could be brought forth by a stronger European Defense Union making common purchase orders. This boon in technological investment for defense could also be accompanied by a boost to space and telecommunications’ investments that would bring strategic independence from US technology, such as the replacement of the Starlink reliance, using its own technology.
The reform of capital markets, alongside higher investment in technological investment associated with the defense sector, could also contribute, alongside additional measures, to a virtuous cycle regarding innovation in the EU.
Despite the EU’s increasing, yet still lower than the US, innovation output indicator , it still lags behind the US and China when it comes to investment in research and developments, focused on small continuous improvements in traditional sectors such as automotive manufacturing instead of breakthrough scientific areas.
Such stifling of innovation, in addition to the reforms and investments already mentioned, could be also be improved by making structural changes to the funding of projects, such as replacing the current civil servants at institutions such as the European Innovation Council (EIC) with actual experts on the fields for which funding is being requested, with, of course, proper compliance supervision.
In parallel with higher investment, EU projects to reform the european academia, like the idea of European degrees (taught across European universities), could prove useful to attract US scientists aiming to escape and thrive despite the attempted persecution so swiftly implemented in the US scientific community, where articles on topics deemed controversial by the administration were pulled, researchers left without their funding, all of which allowing the EU to emerge as a greener pasture than the now unstable US universities).
5. Reflection
Despite the current US administration’s apparent incapability to recognize factual economic data or nuance, instead opting for hammering their own choices into the rest of the world’s economy, that does not mean that all their trade partners (either allies or frenemies) are meant to take it lying down.
The global economic order is changing, disregarding what had been a contemporary history of mutual respect and diplomacy based on the rules-based international order, painted with a broad consensus around the expectations of free(r) trade. It has become clear, though, that a multipolar geopolitical status quo is emerging, pushing Europe to stand on its own ground, with alliances becoming more punctual and less reliable.
To stand its own ground, the EU and its members are not without options, but must take bolder, more proactive, ambitious and flexible action, disregarding the expectations previously set within the traditional transatlantic relationship. Europe should now set itself as the key trade player it has always been foretold to be, but has, so far, failed to live up to its full potential.
The EU is able to learn, adapt and rise to the occasion as we’ve seen in the last graceless and classless episodes emerging from the US. It just has to do it faster and better.
